ACMA RadComms2014Productivity Consequences of flexible regulation

Ian MartinRegional Head of Telco ResearchCIMB Securities

10 September 2014

2

Market sector MFP index and growth rates within productivity cycles

1973

-74

1975

-76

1977

-78

1979

-80

1981

-82

1983

-84

1985

-86

1987

-88

1989

-90

1991

-92

1993

-94

1995

-96

1997

-98

1999

-00

2001

-02

2003

-04

2005

-06

2007

-08

2009

-10

2011

-12

60

120

90

1973-74

1984-85

0.5

1988-89

1993-94

2003-04 2007-08

-(0.7)0.7 0.6 0.9 2.5 0.2 0.0

1981-82

1998-99

Source: PC, Productivity Update May 2013

3

ABS IMT productivity index

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

60

70

80

90

100

110

120

Source: ABS cat 5260.0.55.002, 2014

4

Mobile sub-sector productivity

2006 2007 2008 2009 2010 2011 2012 20130

10

20

30

40

50

60

70

80

90

100

-500

-400

-300

-200

-100

0

100

200

300

400

500

Productivity growth (left hand side)

Productivity level (right hand side)

Pro

duct

ivit

y g

row

th (

per

cent)

Pro

duct

ivit

y level (2

006 =

100)

Source: CIE, RadComm2013

5

CIMB indicative fixed line productivity

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

BIE 1996

ACCC 2004Residential fixed line

Fixed line

Source: BIE, 1996, ACCC 2004, CIMB estimates

6

7

First telecommunications legislation in Australia

8

Highlights of micro-economic reform

Essentially taking government out of direct involvement in allocation of resources in favour of market allocation … productivity enhancing

Reform of GBEs to focus effort on efficiency rather than other objectives

Market driven allocation of spectrum; spectrum licensing; spectrum trading

Quantifying and direct funding of cross-subsidy

Routine cost-benefit analysis

Introduction of competition

Separation of regulation from production and investment: (Austel, ACCC)

Pro-competitive safeguards: access regime, industry specific regulation

Privatisation of GBEs: capital allocation within an efficient capital market rather than by government

Each step contributed to a better matching of resources with likely demand

9

Undermining microeconomic reform...Having got out of direct decision-making on resource allocation, governments get back in through the back door, ie by regulation and direction

Over-eager declaration of services(Calls for separation of declaration from management regulation of access)

Regulatory direction over industry structure(Cost Benefit Analysis of any directed change in industry structure)

NBN: renationalisation, regulated technology preference, rollout preference

1. Management of the access regime to achieve a preferred industry structure and/or distributive outcome … will it undermine mobile productivity?

2. Undermining of competitive neutrality: risk to the Internet of Things (IoT)

3. Extensive Ministerial direction over spectrum allocation

… undermining the ability of the market to match resources with demand is what undermines productivity

… regulatory changes post-investment = sovereign risk

10

Regulated access regime: shifted risk and returnRisks have increased in telecommunications infrastructure investment Invest on one basis … only to see it over-turned post investment commitment ACCC has introduced new concepts post investment commitment, unrelated to economic efficiency

Returns have increased across telco access seekers through redistribution rather than investment Several steps-down in access prices … aggregation among access entrepreneurs Access prices below cost across a broad average of users, disincentive to invest at scale

Structural separation pursued as an claimed ‘reform’ without evaluation Has left risk with owner of infrastructure and distributed returns to access seekers

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Nov 11 May 12 Nov 12 May 13 Nov 13 May 14

CNU share price

NZ$

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14

MTU share price

A$

Pure access seeker share price mid-2009 to mid-2014 Wholesale only network provider share price since separation

Source: IRESS

Undermined market evaluation of network benefits and costs

11

Market valuation: access seeker v. network provider

Access seekerWholesale only

network providerRevenue A$1.0bn NZ$1.1bn Similar revenueEBITDA A$158m NZ$649m 4 times more EBITDAEBITDA margin 15% 61%Network assets A$60m NZ$3.1bn 50 times more assetsIntangible assets A$612m NZ$166mCustomers 800k 1,781k Physical network connectionsDividend 26cps 0cps No dividend in FY14Return on Invested Capital

14% 7.4% Half the ROUC

Market cap, Monday 8 Sept

A$1.4bn NZ$0.7m

Enterprise value A$1.7bn NZ$2.5bnEV/EBITDA FY15 9.3x 4.5x Half the market valuation multiple

“Sources: CIMB, Company reports

Would the ACCC do the same thing in mobile as it has done in fixed line?

12

The Internet of Things: likely largely wireless connected

Source: Altera

What spectrum and allocation approach for IoT? What impact will reservation of fixed backhaul to NBN Co have on IoT industry

structure and development of services?

Reserved backhaul is 35% of NBN Co’s LT revenue

“We believe that the proliferation of mobile devices and the need to service those devices will be one of the key areas driving demand for the NBN.”

NBN Co, Deloitte Access Economics Report,‘Mobile Nation’, Feb 2013

13

Spectrum management and spectrum auctionsACMA has a positive reputation among investors for spectrum management Probably hard not to have a positive reputation given growth in MBB Good spectrum management is ‘below-the-radar’ for secondary market investors

Spectrum auctions Closely followed in the equity market given impact on capex and market How many Ministerial directions are needed to sell a block of spectrum? ‘Red underpants’ requirements unsettle investors 700MHz spectrum price was effectively set by the Minister for Communications

- In effect excluded VHA; how can it be ‘efficient’ to have left so much spectrum unsold- Can’t rectify post-auction without triggering sovereign risk

5G spectrum Will be more closely followed by the market because Demand > Supply

– Where will it come from? Who will have to ‘surrender’ spectrum? What process to manage this?

Process and arrangements should facilitate private sector to evaluate and meet emerging demand

14

What might have been? AWA and mobile telephony, 1949

Source: AWA Annual Report 1949

Mobile wireless

15

Source: AWA Annual Report 1949

What’s that you say, Chris? Productivity and innovation in the mobile sector?

That requires flexible regulation to facilitate market-driven investment and

competition, not over-ride it with regulatory preference.

Roger that, over.